The population of the Middle East and North Africa
is one of the fastest growing in the world. It has nearly quadrupled since 1950
and is expected to double over the next 50 years. But jobs have not grown as
fast as the region's workforce. Although employment growth was relatively strong
in the 1970s, it failed to keep up with demographic pressures in the 1980s, when
oil prices dropped and government-led growth strategies lost steam. The region
entered the 1990s with relatively high unemployment rates, which have continued
to climb in most countries. The average unemployment rate for the seven largest
non-oil or diversified economies in the region--Algeria, Egypt, Iran, Jordan,
Morocco, Pakistan, and Tunisia (hereinafter referred to as the MENA7)--rose from
12.7 percent in 1990 to 15 percent in 2000 (see Table 1). Moreover, underemployment
(employment that does not fully meet workers' capacity or demand for work) remains
pervasive.

Table 1. Unemployment Rates, 1990–2000(Percentage of labor force)

1990

2000

Algeria

19.8

29.9

Egypt

8.6

7.9

Iran, I.R. of

11.6

15.8

Jordan

16.8

13.7

Morocco

12.11

13.7

Pakistan

3.1

7.8

Tunisia

16.2

15.9

Average

12.7

15.0

Sources: National authorities; and World Bank.11991.

The bleak job picture is one of the region's most urgent and destabilizing problems, fueling social tensions, encouraging migration, and making job creation a top priority. But policymakers face some difficult questions. Can current GDP growth generate more employment or will higher GDP growth be required--and, if the latter, by how much? Will the current pattern of job creation--with much of the region's workforce employed by the public sector--need to change? An examination of the experience of the MENA7 over the 1990s sheds some light on these and other questions. Together, these countries account for about 80 percent of the population and the output of the region, excluding the oil-producing countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), which face different economic and employment challenges.

Job growth has not kept up with population growth.

Jobs in the MENA7 grew over 2½ percent a year in the 1990s, relatively
fast compared with other developing country areas. In many developing countries
in Asia and Latin America, employment growth during the 1990s suffered from
economic recessions and restructurings that were brought about by the financial
crises that hit emerging markets. Because of their relative insulation from
world capital markets, Middle Eastern and North African countries weathered
these financial crises relatively well. But in the MENA7, even this solid job
growth could not keep pace with the growth of the working-age population, which
rose at an average rate of 2.8 percent a year during the 1990s (see Figure 1).
As a result, no real progress was made in reversing the increases in the unemployment
rate experienced during the 1980s, and on average unemployment rates increased
again in the 1990s.

While population growth is declining,
demographic pressures on labor markets will remain strong.

In line with the decline in population growth rates that began around 1980, the growth rate of the working-age population is expected to edge down in the years ahead but will do so only gradually and over the next 15 years; the population aged 15 and older is still expected to increase by just under 2½ percent a year in the MENA7. Such demographic pressures will continue to weigh heavily on the region's labor markets.

On average, labor participation rates have been stable.

The impact of demographic pressures on the labor market depends on how much the working-age population participates in the economy. Labor market participation--the percentage of people of working age that are either employed or seeking employment--varies substantially across countries, reflecting a mix of factors, including:

the length of schooling, which tends to lower participation rates for youth;

the level of education, which tends to raise participation rates;

the availability of job opportunities, which tends to raise participation
rates (while the lack of jobs depresses participation rates); and

changing social attitudes, particularly toward women working outside the
home.

Participation of women in the labor force has increased in MENA countries . . .

Despite marked changes in these various factors, the average labor force participation
rate for the MENA7 remained roughly stable over the 1990s, averaging about 50
percent (see Table 2). The implication is that the labor force has grown more
or less in line with the working-age population. However, this general proposition
masks important differences across and within countries. Throughout the region,
as social attitudes evolved and more girls and women received education, female
participation rates increased markedly during the 1990s: by 6 percentage points
in Algeria; 5 percentage points in Jordan; 4 percentage points in Egypt, Pakistan,
and Tunisia; and about 2 percentage points in Iran and Morocco.

Table 2. Participation Rates, 1990–2000

Participation Rate
(Percent)

Female Participation Rate
(Percent)

19901

2000

1990

1999

Algeria

43.0

47.8

12.1

18.1

Egypt

48.2

48.8

19.2

23.1

Iran, I.R. of

51.6

47.5

11.5

13.2

Jordan

48.1

42.8

9.6

14.5

Morocco

55.6

57.6

25.9

27.6

Pakistan

52.8

52.9

17.8

21.7

Tunisia

51.4

52.2

20.7

24.9

Average

50.1

49.9

16.7

20.4

Sources: IMF and World Bank.1Jordan: 1993; Morocco; 1994.

. . . but the participation rate of men has tended to decline.

By contrast, participation rates for men declined in most of the MENA7 countries. The reasons for this are likely to vary from country to country, but a lack of attractive job opportunities may have played a role. The severity of the employment problem is therefore probably greater than indicated by the observed gap between employment growth and labor force growth (about ¼ percent a year).

Participation rates could well rise over the medium term, adding pressure on labor markets.

Over the medium term, a rise in labor force participation rates is likely to compound demographic pressures on the labor market. Female participation rates should continue their upward trend and, with rising education, the participation rates of males should also at some point reverse their recent declines. Where participation rates (particularly for men) have been depressed by a lack of job opportunities, an improvement in job prospects will be accompanied by an even faster increase in the labor participation rate. In this context, reductions in unemployment rates will be more difficult to achieve.

Labor market surveys indicate that rising unemployment has hit mostly first-time job seekers, particularly those with a secondary education. This suggests that unemployment is mainly the result of the countries' inability to create jobs fast enough to accommodate new entrants into the labor force rather than of economic restructuring. It may also reflect the willingness of educated youths to wait for jobs in the formal and public sectors to open up and to register themselves as unemployed in the interim, as well as the educational system's failure to provide its students with the kinds of skills needed for private sector jobs.

Differences in unemployment rates across countries
can reflect differences
in statistical coverage.

Although all countries attempt to conform to standardized definitions of unemployment, differences in coverage can arise and this should caution against comparing countries' performance by their unemployment rate alone. In some instances,
the unemployment rate may be overstated, as is likely in Algeria and in Tunisia.
Also, unemployment statistics do not capture the problem of underemployment,
which can be important, particularly in rural areas.

Public sector employment remains a main source of job creation.

The public sector remains an important source of employment and job creation. On average, public sector employment accounts for about 20 percent of total employment and about one-third of nonagricultural employment in the MENA7 countries (see Table 3). The share is even higher in Algeria, Egypt, Iran, and Jordan. The evidence suggests that the share of the labor force employed in the public sector may have increased in some countries over the 1990s, as private sector growth stagnated and governments were forced to become employers of last resort. Thus, although governments seeking to redress public finances have contained public sector wages, the MENA7 government wage bill, as a percent of GDP, has continued to rise, to about 11 percent of GDP--one of the highest in the world.

Table
3. Government and Public Sector Employment, 1996–2000(Percent)

General Government
Employment

Public Sector Employment

Percent of
total
employment

Percent of
nonagricultural
employment

Percent of
total
employment

Percent of
nonagricultural
employment

Algeria

25.7

32.0

31.3

39.0

Egypt

28.2

56.6

34.9

70.3

Iran, I.R. of

. . .

. . .

28.4

36.6

Jordan

33.9

39.5

36.1

42.1

Morocco

8.5

18.6

9.5

20.7

Pakistan

8.4

15.0

9.6

17.1

Tunisia

14.9

19.1

21.9

28.2

MENA7

. . .

. . .

20.0

33.1

Source: World Bank, Public Sector Employment database, 2002.

Underlying these regional trends, there are some important differences between the MENA7 countries over the 1990s.

Jordan faced one of the highest growths in working-age population
(averaging over 4 percent a year from 1994 to 2000) in the MENA7 group. Job
growth, although substantial (3¾ percent a year), did not keep up. Still,
the unemployment rate fell significantly over the decade, from 19.7 percent
in 1993 to 13.7 percent in 2000, because of migration of skilled labor to
countries of the Gulf Cooperation Council and a decline in domestic labor
market participation
rates, particularly for men, which may have reflected the withdrawal of unemployed
workers from the labor force in the face of inadequate job opportunities.
Discouraged workers who have left the labor force are estimated at nearly
4 percent of
the labor force. Low-productivity jobs appear to have led job growth, as reflected
in the fact that labor productivity (output per employed person) fell during
the 1990s and that nearly 6 percent of the workforce is reported to be underemployed.

Iran experienced the second-highest growth of the working-age
population (3½ percent a year 1990­2000) in the group. As in Jordan,
participation rates dropped quite markedly, but not enough to make up for
the low rate of job creation (2¼ percent
a year), with a resulting rise in the unemployment rate. Unlike in Jordan,
labor productivity growth during the 1990s was quite high. To some extent,
the observed increase in productivity in Iran can be traced to a more intense
use of existing productive capacity, much of which had been underutilized,
rather than technological progress.

Egypt and Tunisia experienced small declines in unemployment
rates and similar demographic trends in the 1990s: the working-age population
grew between 2½ and 3 percent a year; participation rates rose; and employment
grew slightly faster than the labor force. The main difference between the
two countries lies in the labor productivity growth that accompanied job growth:
during the 1990s, output per person employed grew by an average of 2 percent
a year in Tunisia and 1 percent in Egypt. This difference can be ascribed
in part to the dominant role played by agriculture and government in Egypt,
sectors
in which productivity growth tends to be lower.

Algeria experienced the largest increase in measured unemployment
over the 1990s. Job growth (2¾ percent a year) did not keep up with the
growth of the working-age population, but the increase in unemployment is
to an even larger degree due to a marked increase in labor participation rates,
in particular of women, but also of men. Pro-employment schemes introduced
in the 1990s may have played a role in encouraging more people to enter into
the labor force and register as unemployed. This factor may account for some
of the increase in the observed unemployment rate, which at 27 percent in
2001
is by far the highest in the group. Still, Algeria's unemployment rate is
likely to be overstated because of the difficulty of fully capturing employment
in
the informal sector.

Gaps in coverage, notably of the rural sector in the early 1990s,
somewhat complicate the analysis of labor market developments in Morocco. The
working-age population grew by 2½ percent, and participation rates edged
up a bit during the 1990s. There was a slight rise in unemployment, driven
primarily by rising urban unemployment. Labor productivity growth was generally
low in both the agricultural and nonagricultural sectors. The unemployment
rate is now 13 percent but reaches 20 percent in urban areas. In rural areas,
unemployment is low, but underemployment is likely to be widespread. Unemployment
declined slightly in recent years, but the decline mainly reflects a drop
in participation rates.

With job growth averaging 2 percent a year--against labor force
growth of 3 percent--Pakistan experienced a large increase in the unemployment
rate over the 1990s, albeit from a very low level. Labor productivity growth,
however, appears to have been relatively high, close to that of Tunisia.

Low job growth does not appear to come from a low-employment content of GDP growth.

The employment deficits described above may have arisen from inadequate output growth and/or from an anti-labor bias in the economy. Such a bias can arise if policies distort economic choices in ways that promote more capital-intensive production to the detriment of employment. In some countries, government expenditure and credit policies may have favored capital-intensive activities. However, at the regional and macroeconomic levels, there is little evidence of an anti-labor bias in the economy. At least by international standards, on average GDP growth was not poor in employment in the MENA7. The elasticity of employment (the ratio of employment growth to GDP growth) for the MENA7 group was 0.7--roughly the same as for developing countries in the Western Hemisphere--compared with about 0.4 for the United States and developing countries in Asia (excluding China), 0.3 for the European Union, and 0.1 for China (see Figure 2).

Productivity growth has been generally quite low by international standards . . .

The evolution of labor productivity provides another insight into the relationship
between GDP and employment. Labor productivity (measured as GDP per person employed)
grew relatively slowly in the MENA7 countries (1 percent a year on average)
compared with other regions. Low productivity growth, in turn, limits the potential
for real wage growth (an increase in wages after accounting for inflation).
Indeed, the evidence shows that real wages in the manufacturing sector declined
in Algeria, Egypt, and Jordan during the 1990s. The weak labor productivity
growth appears to have resulted from both a slowdown in the rate of capital
accumulation and weak growth in total factor productivity (productivity gains
from a more efficient use of capital and labor and from technological progress).
In fact, the growth in total factor productivity was negative in some countries. More detailed microeconomic
analyses would be necessary to identify the sectors in which productivity growth
grew slowly, but the overall result might indicate that underemployment and
low-productivity jobs have increased.

The weakness of productivity growth during the 1990s is particularly striking in light of the gains made in educational achievement in MENA countries. Although countries in the Middle East and North Africa still lag behind many developing countries in Asia and Latin America in terms of educational achievement, particularly with respect to women, they have made impressive strides since 1975. The average number of years of education completed by adults 15 years of age and older in Algeria, Egypt, Iran, Jordan, Pakistan, and Tunisia more than doubled between 1975 and 2000, compared with an average increase of only about 50 percent for other developing countries. But, contrary to expectations, the return (in terms of productivity gains) on this investment in education appears to have been relatively low in MENA countries. Part of the reason may lie in a mismatch between the skills required in the modern job market and those provided by the education system. The attractiveness of public sector jobs can contribute to this mismatch by encouraging students to specialize in fields that give them access to a government job but have limited appeal to potential private sector employers.

. . . perhaps reflecting the dominant role of public sector employment, where productivity gains tend to be low.

The continued strength of government job creation, where measured productivity gains tend to be lower, may also have been a reason for the slow growth of overall labor productivity. Indeed, the three countries with the lowest rates of labor productivity growth (Algeria, Egypt, and Jordan) are also the ones with the largest share of government employment (see Table 3). Large public sectors probably also affected GDP growth, as public employment had to be financed by higher taxes, cuts in other (more productive) spending, or larger deficits.

Will job creation only come through lower wages and thus more labor-intensive production methods?

Does faster job creation require promoting more labor-intensive production methods by cutting wages? Is there a limit to how fast MENA economies can grow? The answer to these questions depends on the factors constraining GDP growth. If it is insufficient demand that is constraining GDP growth, more employment can only be generated at the cost of lower wages, which, in turn, induce more labor-intensive production and thus lower labor productivity (i.e., more employment for the same level of output). Similarly, technological progress, by enabling less labor to produce the same amount of goods and services, would destroy jobs. But if output is constrained on the supply side because enterprises do not find it profitable to expand production, then technological improvements would raise profitability and thus contribute to higher levels of investment, employment, and output without necessarily reducing wages.

Not if MENA countries can move to a faster growth path by improving productivity and competitiveness and taking advantage of the growth in world trade.

Inadequate demand for a country's products can limit growth over the short to medium term. The exhaustion of the government-led growth strategy that had propelled much of the growth in earlier decades and the absence of an adequate domestic private-sector response to take its place contributed to restrain growth in the 1990s in MENA countries. But tapping more effectively into world demand--world trade grew at an average of 7 percent in the 1990s--could have compensated for weak domestic demand. MENA countries lost a significant market share in export markets over the 1990s compared with other developing countries. Given this unrealized potential demand, growth in MENA countries is more likely to be restrained by supply-side constraints than demand limitations. So, enhancements in productivity, by reducing costs, would stimulate investment, growth, and thus employment.

Acceleration of GDP growth by about 2 percent would be required to halve unemployment rates over the next 15 years while sustaining real wage increases.

The solution to the employment problem in the Middle East and North Africa is closely connected to an improvement in GDP growth performance. How much more GDP growth would be needed to address the employment needs of the region over the medium term? Reducing unemployment rates by half over the next 15 years while meeting the job needs of new entrants into the labor force would require that average employment growth increase to about 4 percent a year in the MENA7. Less would be needed in Egypt, Morocco, and Tunisia, and more in Algeria and Jordan. In all countries, job creation would have to speed up. A cut in real wages would accelerate job creation by increasing the labor intensity of production, but would have adverse social costs. If the twin objectives of creating jobs and improving living standards are to be achieved, a leap in GDP growth is necessary, possibly by as much as 2 percentage points a year over the recent trend of 3.7 percent annual growth. Growth would need to increase markedly in all countries except Tunisia, and most significantly in Algeria and Jordan.

Policy reforms undertaken to date have not yielded the desired growth response.

What policy reforms can enhance growth prospects? Many countries in the regions have made efforts to improve the climate for growth by restoring and maintaining macroeconomic stability, raising education standards, opening up their economies to the private sector, and integrating into the global economy through gradual trade liberalization. Yet, the private sector has not achieved much in the way of growth and job creation, particularly compared with more dynamic emerging markets.

Promoting competition and building stronger institutions could help unleash innovation and growth.

This highlights the fact that private sector ownership is not a sufficient condition for market economies to develop. For the private sector to enhance competitiveness and growth, it needs to be supported both by well-functioning markets that promote competition and reward innovation and by solid institutions that help manage change and resolve conflicts among market participants. On both counts, Middle Eastern and North African countries have a long way to go.

Competition tends to be stifled by public sector dominance and anti-competitive practices . . .

In most MENA countries, entrepreneurship and innovation are stifled by the dominance of public enterprises. Private sectors are also often shielded from competition by restrictive trade regimes and other anticompetitive policies. By accelerating privatization, liberalizing external trade, and opening up domestic markets, MENA countries could strengthen competition and innovation, which, in turn, would spur economic growth. The experience of other economies has shown that liberalization can initially lead to employment losses. But these transitional costs would be offset by greater benefits over the medium term.

. . . and by weak institutions that promote rent seeking rather than entrepreneurship.

Strong, transparent institutions play a key role in fostering competition and the development of markets. Legal, administrative, and institutional obstacles weigh heavily on the private sector and tend to encourage rent seeking rather than entrepreneurship, thereby hurting competitiveness and dampening growth. "Second-generation" reforms aimed at creating an investment climate more propitious to innovation and competition appear to be the key to unlocking the region's growth potential. These reforms include adopting modern legal and regulatory frameworks for property rights; foreign direct investment, and financial transactions; establishing competent and independent judiciary systems; introducing fair, transparent, and effective tax systems; and eliminating bureaucratic intrusiveness and corruption.

Labor market rigidities in some countries are likely to impose serious efficiency costs and could undermine the economy's ability to grow in response to structural changes.

Are labor markets in the Middle East and North Africa flexible enough to allow enterprises to adjust to stronger competition and innovation and to promote employment? The evidence is mixed. Real wages in the industrial sector of selected countries appear to be quite flexible, and labor market regulations, while widespread, are generally no more prevalent than in other developing countries. In some countries, labor market regulations are more binding and impose serious costs on enterprises operating in the formal sector. Although the impact of these regulatory rigidities on aggregate employment may be muted by the presence of large informal sectors, the distortions can have significant efficiency costs. The adverse effects on growth and employment are likely to be most severe during times of structural transformation, when labor market rigidities interfere with enterprises' ability to adjust to changing market conditions. In these circumstances, targeted labor market reforms, in combination with the creation of more competition in the private sector, could have a significant payoff. The social considerations that underlie many labor market regulations would need to be addressed through other means, possibly including a more effective social safety net for the unemployed.

High public sector employment may have been a legitimate response to weak private sector growth, but it also distorts incentives and imposes costs on the private sector.

Are there costs to sustaining employment through the public sector? The preponderant role of the public sector in most countries in the region may well be a natural policy response to lackluster job growth in the private sector and might be difficult to reverse unless the private sector begins to expand. At the same time, public employment policies impose costs on the private sector and distort incentives in ways that can harm growth. These considerations argue for a gradual retrenchment of public sector employment. Because of the premium placed by public sector jobs on educational achievement rather than the acquisition of marketable skills, the attractiveness of public sector employment (in terms of job security and, in some countries, relatively high wages) may have contributed to the skill mismatch observed in the region. The skill mismatch, in turn, increases pressures on the public sector to absorb graduates unable to find jobs in the private sector.

Promoting competition, greater labor market flexibility in some countries, and institutional strengthening throughout the region are key to higher employment and living standards.

The leap in growth required to reduce unemployment in the Middle East and North Africa over the medium term calls for ambitious, broad-based reforms. Opening the private sector to stronger competition while strengthening the institutions that support private markets can encourage investment and stimulate productivity growth. The positive impact on employment, in turn, can be enhanced through targeted labor market reforms, such as more flexible labor market regulations, to enable enterprises to respond to market signals. In this process, the role of the public sector will need to be reshaped from purveyor of jobs to provider of a sound physical and institutional infrastructure.